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THE STOCK MARKET HAS now been falling for two weeks and the Dow Jones Industrial Average has moved below its rising trendline (see Chart 1). Given a plethora of technical evidence now in place, the bears have been taking the market back piece by piece and there is good reason to expect them to take advantage of their new standing.

Chart 1

Technical resistance is now in place since twice last month, the Dow was stopped at roughly 13,135 and when it fell below 12,715 it completed a "double top." This pattern is shaped like the letter "M" and only when prices fall below the middle trough of the pattern do chart watchers get their signal to sell. They got it on May 21.

But we have to keep things in perspective. The pattern was certainly in proportion to the rally it is supposed to be ending but the whole rally and reversal are still rather small time moves. In other words, let's not read long-term implications from the end of a short-term rally. It was a bearish event, for sure, but it would take new lows for the year to tell us that another significant leg lower on par with the October-January decline is at hand.

In order to understand the new power of the bears we have to examine how they got it. When the double top pattern was completed, the Dow also suffered another technical blow -- a breakout failure. In April, the market moved higher from a big January-April trading range to set a rather bullish tone despite continuing credit problems and rising energy costs. The market was speaking.

By measuring the size of the trading range and projecting it up from the breakout point, the rally "should" have continued to 13,870. This is a common way of gauging how much pent up demand existed in the range. And as ace technical analyst Ralph Acampora once said, "The bigger the base, the higher in space." Trading ranges are bases from which rallies emerge.

But not all technical signals work and the Dow did not even get close to its target. By moving well back down into its old range, the rally was confirmed to be over and the market not as healthy as it looked on the surface. Falling trading volume and persistent high numbers of new 52-week lows had finally taken their toll.

So now what? Does the market go back down to its January and March lows? While my inner bear thinks so, there is a nagging contrary indicator to consider. Investors are suddenly very bearish as a group.

According to a American Association of Individual Investors survey released last week, the percentage of investors considering themselves bears has risen to 45%, an usually high number. When sentiment readings such as this move to extreme levels, the market often reacts by moving in the opposite direction. In other words, bearishness can be a buy signal for contrarians.

But sentiment analysis is a tough game and any indicator can signal an extreme condition long before the market actually makes a move. Take this latest indicator of bearish sentiment as something to temper bearish views rather than a precursor of bullishness.

For now, the bears have the ball.

Follow up on Bonds

Last week, I wrote that the Treasury bond market's weakness was another problem for the stock market as rising interest rates in a non-deflationary environment where bad for stocks (see Getting Technical, "How Long Can Stocks Ignore Treasuries?" May 29). Since that time, bond prices have rallied and yields have declined but the overall conclusions reached remain intact (see Chart 2).

Chart 2

The chart shows that while the 30-year yield has dipped back below the 4.70% breakout level identified last week, the pullback has not invalidated the breakout itself. Yields only dipped roughly 2% below that level and that is well within the realm of an acceptable correction. Further, yields remain above the rising trendline drawn from the March low so from a practical point of view the bull market in yields and bear market in bond prices remains intact.

And so do the implications for the stock market. Lower stock prices seem more likely than higher prices with the caveat that heavy bearishness among individual investors has removed one source of potential sellers from the market.

Getting Technical Mailbag:Send your questions on technical analysis to us atonline.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.

Michael Kahn, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.